AUSTRALIA’S flagging automotive manufacturing industry needs to “significantly” reduce its costs and increase its output if it is to survive, according to the Productivity Commission’s interim report into the state of the local industry.

The report comes just over a week after Holden announced it would shut its local manufacturing operations in 2017 after a “perfect storm” of negative influences made it impossible for the company to make a profit building cars here.

The report highlights “global forces” that are driving major changes in the demand for cars and the “size, scale and location of production”.

Automotive production in developed economies such as Australia, the United States, the United Kingdom and Belgium has been scaled back as they struggle to recuperate from the global financial crisis. As a result, many plants are operating well below capacity.

Labour costs were highlighted as one of the main reasons Australia has become less competitive on the global stage in recent years, with Australia on par with wages in countries such as Germany and Japan, around “four times or more” than that of China and Thailand.

The Presiding Commissioner Mike Woods said there is constant pressure for car-makers to reduce manufacturing costs.

“Labour costs and the scale of production are key drivers of these costs, for both vehicle and component manufacturers,” he said. “In Australia’s case, all vehicle assembly plants are producing well below the scale needed to be internationally cost competitive. And Australia's automotive manufacturing labour costs are substantially higher than in countries such as China, Thailand, Mexico and the Republic of Korea.”

Mr Woods said one of the major challenges facing the industry was low production volume, but local sales volumes were only part of that answer because of Australia’s fragmented, small and massively competitive domestic market.

“While exports can provide further opportunities for volume growth, the challenges of exporting from Australia include the high costs of production, competition from lower cost affiliated plants within the global companies, continuing barriers to trade and, at present, the sustained high Australian dollar.”

The report found that sales of vehicles that are currently built here – Holden Commodore and Cruze, Toyota Aurion and Camry, Ford Falcon and Territory – are limited thanks to the fragmented market.

“A substantial increase in the volume of production in Australia would be needed for any motor vehicle producer to improve their financial performance in the long term, but increasing the volume of production is challenging,” the report said.

To the end of November this year, Australians have bought 106,722 locally made cars, well below the 200,000 to 300,000 needed each year for a production facility to be competitive.

The report found that Australia’s component manufacturers face pressure to reduce costs and adjust to the changing environment thanks to the closure of Ford and Holden’s local operations from 2016 and 2017 respectively, but that companies who adapted to the changes early could thrive.

“The shift toward global automotive platforms may create opportunities for some automotive component firms in Australia but may lead to the closure of others,” the report said.

Shifting consumer tastes from traditional larger family sedans to smaller, more fuel efficient cars and SUVs has impacted heavily on the local industry, with Australia producing just one small car (Holden Cruze) and one SUV (Ford Territory).

“Worldwide, consumer preferences for motor vehicles have been changing.

Smaller, more fuel-efficient vehicles and SUVs have become more popular, and pickup truck sales have also been growing,” the report found.

A position paper which will consider possible options for government assistance to the industry will be released on January 31, 2014 and the final report is due on March 31.